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CHINA LIFE INSURANCE COMPANY LIMITED

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CHINA LIFE INSURANCE COMPANY LIMITED Powered By Docstoc
					          EAST ASIA SECURITIES COMPANY LIMITED
          9/F, 10 Des Voeux Road Central, Hong Kong.
          Dealing: 3608 8000 Research: 3608 8097 Facsimile: 3608 6132
                                                                                                  HONG KONG RESEARCH
                                                                                                           th
Analyst: Paul Sham                                                                                       27 March 2009
                                                            .

               CHINA LIFE INSURANCE COMPANY LIMITED (中國人壽)
Sector             :   Insurance                                Chairman                                : Mr. Yang Chao
HKSE Code          :   02628
Market Price       :   HK$26.15 (27/03/2009)                    Executive Director & President          : Mr. Wan Feng
Shares Issued      :   7,441.2m (H shares)
Mkt. Cap.          :   HK$194,587.4m (H shares)
52 weeks Hi/ Lo    :   HK$35.60 / HK$15.30
HSI / HSCEI        :   14,119.50 / 8,481.22(27/03/2009)
Main Business      :   Life insurance businesses

            SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31ST DECEMBER 2008
Final Results Highlights

                                                                           FY2008           FY2007
                                                                       RMB million        RMB million          Change
Gross written premiums and policy fees                                   135,325            111,886            +20.9%
Net earned premiums                                                      134,650            111,404            +20.9%
Net investment income (recurring)                                         44,050             44,020             +0.1%
Net realized/unrealized gain/(loss) from investments                     (13,812)            34,228            -140.4%
Other revenues                                                             1,923             1,720             +11.8%
Total policy benefits & expenses                                        (144,235)          (146,390)             -1.5%
Profit before taxation                                                    22,804             45,391             -49.8%
Taxation                                                                  (1,390)           (6,331)             -78.0%
Profit attributable to shareholders                                       21,277             38,879             -45.3%

Basic EPS (RMB)                                                             0.72                 1.38           -47.8%
Final DPS (RMB)                                                             0.23                 0.42           -45.2%
Total DPS (RMB)                                                             0.23                 0.42           -45.2%

•   China Life Insurance (China Life) recorded a 45.3% y-o-y decline in FY08 earnings to RMB21,277m,
    broadly in-line with the market forecast of RMB21,629m. The main reason for the negative growth was
    its poor investment performance in FY08, which was partially offset by a strong rise in net premium
    earned and lower policyholder dividend.
•   Net premiums and policy fees earned increased by 20.9% y-o-y in FY08, primarily due to increases in
    gross premiums and policy fees earned from the individual life insurance (+23.3% y-o-y) and accident
    & health insurance (+9.6%). Nevertheless, weakness was seen in group life insurance, falling 44.7% y-
    o-y. Despite the strong growth in total gross premium and policy fees earned (+20.9% y-o-y) and
    stable investment income (+0.1% y-o-y), huge realized/unrealized losses from investment was the key
    driver to drag the bottom line of China Life.
•   China Life’s total expenses in FY08 was largely flat at RMB144,235m, down only 1.5% y-o-y.
    Insurance benefits and claims, the largest component of operating expense, decreased 2.1% y-o-y to
    RMB129,990m in FY08, mainly attributable to lower policy dividends which dropped 91.5% y-o-y from
    RMB29,251m in FY07 to RMB2,492m in FY08, amid lower investment yield in participating products.
•   Basic EPS was RMB0.72, down from FY07’s RMB1.38. A final DPS of RMB0.23 was proposed,
    representing a payout ratio of 31.9% for FY08 (FY07: 30.4%). China Life’s latest embedded value
    amounted to RMB240,087m, down slightly from RMB252,568m in 2007.
•   China Life remained the No.1 life insurer in the Mainland, commanding a market share of 40.3% in
    FY08 (FY07: 39.7%).
This report has been prepared solely for information purposes and we are not soliciting any action based upon it. Neither
this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of
any kind or form whatsoever. The information is based upon information which we consider reliable, but accuracy or
completeness is not guaranteed. Opinions expressed herein are subject to change without notice. At time of this report,
East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein.
         EAST ASIA SECURITIES COMPANY LIMITED


Business Review

•   Breakdown of gross written premiums & policy fees and deposits by business segments:
    (RMB million)                                                          FY2008     FY2007       Change
    Gross written premium                                                  108,235    91,420       +18.4%
      Term Life                                                              300        175        +71.4%
      Whole Life                                                           35,402     31,943       +10.8%
      Endowment                                                            45,816     40,278       +13.7%
      Annuity                                                              26,717     19,024       +40.4%
    Policy fees                                                            13,217      7,064       +87.1%
    Individual life gross written premiums and policy fees                 121,452    98,484       +23.3%
    Gross written premium                                                    324        876        -63.0%
     Term Life                                                               25          9        +177.8%
     Whole Life                                                              274        678        -59.6%
     Annuity                                                                 25         189        -86.8%
    Policy fees                                                              507        627        -19.1%
    Group life gross written premiums and policy fees                        831       1,503       -44.7%

    Accident & Health gross written premiums                                13,042    11,899        +9.6%

    Total gross written premiums and policy fees                           135,325    111,886      +20.9%


•   Individual life insurance business saw a 23.3% increase in gross written premiums and policy fees
    in FY08, which grew faster than other segments. This increase was primarily due to increases in the
    business volume of traditional and participating products such as whole life (+10.8% y-o-y),
    endowment (+13.7%) and annuity (+40.4%). Increase in policy fees (+87.1%) also contributed a large
    portion to the growth in individual insurance business.

•   Group life insurance business recorded a 44.7% plunge in gross written premiums and policy fees in
    FY08, primarily due to the change in corporate annuity policy put forward by the government, which led
    to a substantial decline in both the sales of annuity (-86.8%) and whole life products (-59.6%).

•   Accident & short-term health insurance business registered a healthy growth of 9.6% in gross
    premium and policy fee income. This increase was primarily due to increased sales efforts in these
    areas.

•   Net investment income The net-investment yield dropped from 5.76% for FY07 to 4.96% for FY08,
    due to a decline in dividends from equity investment. With realised and unrealised losses on trading
    securities totalling RMB13,812m in FY08 (vs RMB34,228m gains in FY07) amid the sharp fall of the
    capital markets, the total investment return fell from 10.24% for FY07 to 3.4% for FY08.

    Investment portfolio                       31/12/2008                 31/12/2007
                                           (RMB million)              (RMB million)               Change
    Debt securities                             575,885    61.4%           443,181    52.1%       +29.9%
    Term deposits                               228,272    24.4%           168,594    19.8%       +35.4%
    Equity investments                           75,082     8.0%           195,147    23.0%        -61.5%
    Cash & cash equivalents                      34,085     3.6%            25,317     3.0%       +34.6%
    Others                                       24,079     2.6%            17,970     2.1%       +34.0%
                     Total investments          937,403   100.0%           850,209   100.0%       +10.3%

•   China Life slashed the proportion of equity securities held to 8% from 23%, while increasing debt
    securities to 61.4% from 52.1% and lifting term deposits to 24.4% from 19.8%. The management
    guided that they would keep a low equity exposure in its investment mix given their belief that the
    financial crisis had yet to bottom.



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         EAST ASIA SECURITIES COMPANY LIMITED


Outlook & Prospects
•   Back to basic in 2009 We think the latest operating results show that the growth of China Life cannot
    depend on the fluctuating investment income anymore. Given the worsening economic outlook in
    China, it is unlikely for Chinese stock markets to fully revive in 2009. Therefore, we are not optimistic to
    China Life’s investment income in the near term. In contrast to its rival, Ping An Insurance, which has
    diversified its businesses into different financial services, China Life only sticks to traditional insurance
    business. Therefore, the key driver for China Life’s FY09 net profit will solely rely on the organic growth
    in its insurance business which may not be able to continue delivering significant bottom line growth in
    2009.

•   Solvency ratio much ahead China Life’s capital fell substantial from RMB38,879m in 2007 to
    RMB21,277m in 2008 as a result of the mark-to-market impact on equities. Owing to the fall in
    shareholders’ equity, solvency coverage fell from 525% to 310%. Nevertheless, China Life’s
    solvency ratio is still ahead of its main rival, Ping An’s 100%-150% levels.

•   Bear market favouring insurance business With the tumbling A-share market since 1Q08, people
    should start reconsider the lower-risk insurance products. Given the volatile equity market and the
    move that PBOC initiated a series of cuts to the benchmark interest rates of RMB deposits, the
    attractiveness of insurance products should have re-emerged in the eyes of investors.

•   Pricy valuations justified by long-term growth prospect Trading at 23.9x 09E P/E and 3.08x FY08
    P/EV, valuations of China Life are not particularly cheap amid the near-term uncertain economic
    outlook. However, given its strong rural franchise and brand name in China, China Life should be an
    appropriate long-term core holding in the fast-growing China economy. We therefore recommend a
    “Long-term Hold” rating for the counter.

Recommendation: Long-term Hold




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         EAST ASIA SECURITIES COMPANY LIMITED

Important Disclosure / Analyst Certification / Disclaimer

This document is published by East Asia Securities Company Limited, a wholly-owned subsidiary of
The Bank of East Asia, Limited (BEA).

The research analyst primarily responsible for the content of this report, in part or in whole certifies
that the views on the companies and their securities mentioned in this report accurately reflect his/her
personal views. The analyst also certifies that no part of his/her compensation was, is, or will be,
directly, or indirectly, related to specific recommendations or views expressed in this report.

This report has been prepared solely for information purposes and has no intention whatsoever to
solicit any action based upon it. Neither this report nor its contents shall be construed as an offer,
invitation, advertisement, inducement or representation of any kind or form whatsoever. The
information is based upon information, which East Asia Securities Company Limited considers
reliable, but accuracy or completeness is not guaranteed. Information and opinions expressed herein
reflect a judgment as of the date of this document and are subject to change without notice. Any
recommendation contained in this report does not have regard to the specific investment objectives,
financial situation and the particular needs of any specific addressee. This report is not to be taken in
substitution for the exercise of judgment by respective readers of this report, who should obtain
separate legal or financial advice. East Asia Securities Company Limited and / or The BEA Group
accepts no liability whatsoever for any direct or consequential loss arising from any use of this report
or further communication given in relation to this report.

At time of this report, East Asia Securities Company Limited has no position in securities of the
company or companies mentioned herein the report, while BEA along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this
report. BEA and its associates, its directors, and/or employees may have positions in, and may effect
transactions in securities mentioned herein and may also perform or seek to perform broking,
investment banking and other banking services for these companies.

BEA and/or any of its affiliates may beneficially own a total of 1% or more of any class of common
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